Automotive Report Germany

Initial conditions: Germany has many attributes that are conducive to sustainable long-term growth, including a highly skilled workforce, good infrastructure and stable institutions. Its economic underperformance in recent years has in large part been the result of deficient consumer demand, although there are some supply-side rigidities in services. The structural adjustment of a shift towards a more service-oriented economy will affect Germany more than many other OECD members, because the share of manufacturing industry in Germany is still substantially higher than in comparable countries.

Demographic trends: The population of working age will remain broadly stable until about 2010. In 2011-20 it is projected to decline at an annual average rate of 0.3% per year. Until 2020, the decline in the working-age population should be partly offset by an increase in participation and employment rates (the labour force and employed persons as a share of the population of working age). The tightening of conditions for long-term unemployment benefits has increased the incentive to seek jobs, and additional measures in the same direction are likely in the long term. Incentives for early
retirement are being reversed, and the statutory retirement age is being raised from 65 to 67 years over the period from 2012 to 2029. Under EU rules, Germany will also have to lift restrictions on immigration from most new EU member states no later than April 2011. The experience of member states that have already opened their labour markets to nationals of new EU member states suggests that immigration from central and eastern Europe could make a modest contribution to alleviating Germany's labour shortages. There is also the possibility of a further liberalisation of immigration rules for highly skilled workers from non-EU countries. After 2020, Germany's demographic profile will deteriorate markedly.

External conditions: As an export-oriented country, Germany benefits from the generally liberal world trade order and suffers disproportionately when global demand flags. Generally, Germany suffers less than other developed countries (for example, Italy) from competition from emerging markets, such as China and India, owing to its specialisation in high-technology capital goods. This specialisation will also allow it to benefit from strong demand from these countries as they upgrade their capital stock. However, over the longer term, German output will come under more pressure as manufacturers in emerging markets become more sophisticated and challenge German producers head on in high-end merchandise goods. Within the EU, trade in goods will remain open, and the liberalisation of trade in services, which has made slow progress, should also continue. Protectionism in the world economy would be highly damaging to the German economy. This is unlikely in the near future, but cannot be ruled out over the longer term. There is less risk of protectionism in the EU, but even this is possible if its political underpinning were to weaken.